Bearish Japanese Candlesticks
Just like chart patterns, there are also bearish continuation japanese candlesticks patterns. These patterns will show us possible continuation in a downtrending stock.
As mentioned earlier, there is a time for everything. There is a time to buy, a time to sell and a time to stand aside and do nothing at all.
As an investor or trader, every day, you will be faced with the decision of whether to buy, sell or hold on to a position. Here, you will learn some bearish japanese candlesticks continuation patterns.
These patterns are helpful in identifying a possible entry for a short position. If you are already in a short position, the presence of these patterns will give you confidence to continue to hold on to that position.
You will notice that these patterns are the exact opposite of the bullish japanese candlestick continuation patterns. All you need to do is just flip and reverse it in your mind. I have included the bearish versions and their descriptions here because it might be difficult to do so for those who are new to investing or trading.
Falling Three Methods
The falling three method consists of 5 candles. The first day is a long red bar representing a big move downwards. However, for the next 3 days, we see the stock going up. These up moves are formed with three smaller bodies.
The picture above shows three bars of counter trend move upwards. Three counter trend bars is the ideal number for this setup. However, it is not unusual to see 2-5 bars of counter trend moves. The important thing to remember is that the upward bars does not close above the open of the first large red candle.
At least two of these small bodies are green in color. During these periods, the stock appears to go nowhere. It is considered a period of rest. Also, remember, small bodies signifies that momentum is not strong and is slowing down. When the stock goes up for a few days in a downtrend, it is good to see it go up with a slowing momentum.
On the fifth day, the stock drops in price forming a long red bar. The presence of the long red bar signifies that prices have broken out of the short trading range. Thus, the stock will continue its downtrend.
During a downtrend, the presence of up green bars will cause some concern among the bears. However, over the next few days, the bulls could not take the price higher. As the bulls could not take the stock higher, the bears become more confident. Thus, the downtrend will likely continue.
If you are still holding on to the stock, the formation of this pattern can give you a warning that things might get worse before they get better. Some traders who short, will enter on the fifth day when the stock goes below the low of the fourth day.
Traders will look for other clues on how to play this pattern. For example, if the fourth day's price closes near a resistance and an overbought signal is seen in the oscillators, then traders will look to enter on the fifth day.
Separating Lines Bearish
This japanese candlesticks pattern is formed in a downtrend. After the stock has moved down, a long green candle appears. When a bullish green candles appears in the downtrend it causes some concerns among the bears.
However, on the next day, the stock gaps down and opens near the opening of yesterday's candle. The stock opens at its high and continues to move down throughout the rest of the day, closing near the lows.
For the bears, the presence of a long green candle in a downtrend can be scary. This causes some concern among the bears as to whether the trend will continue or not. On the day where the long green candle formed, those who have shorted the stock at the opening are in a losing position. They fear that the bulls may be gaining control.
The fact that the stock gapped down the next day and continued to move down shows that the bulls have lost control. The gain yesterday was completely erased. The bears are winning and there is a great possibility that the downtrend will continue.
It is good to look for a confirmation on the third day. It could either be another bearish candle, a gap down or a lower close the next day.
Downside Gap Three Methods
This japanese candlesticks pattern appears in a downtrend. During the downtrend, two red candle bars are formed. The second red candle gaps below the first red candle. On the third day, a green candle forms. This green candle closes the gap between the two red candles.
When the first two red bars are formed, the stock is in a very bearish mood. This is because the stock gapped down. However, gaps are usually filled. On the third day, the stock closes the gap forming a green candle bar.
The fact that it closes the gap almost immediately, suggests that the upward move is only a temporary bounce up and not a buying of the stock. The bounce up day may be a short covering day. Once the short covering disappears and the gap filling is satisfied, the downtrend should continue.
Gaps are also regarded as excellent support and resistance areas. Thus, it is good to wait for confirmation on the fourth day. This can either be another gap down, a red candle bar or a lower close. Once you see that, the downtrend is more likely to continue.
Downside Tasuki Gap
This japanese candlesticks pattern is quite similar to the downside gap three method. The difference is, the gap between the first two bars is not filled on the third day.
When a gap appears in a downtrend and is not filled on strength during the third day, it shows us that there is still strength in the downtrend. In other words, there is still weakness in the stock. The slight upward move on the third day is regarded as a short covering day. After the short covering is done, the downtrend should continue.
Again, as with most japanese candlestick patterns, it is good to wait for a confirmation on the next day. This confirmation could be either another gap down, a red candle bar or a lower close.
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